DO NOT Purchase Foreign Mutual Funds - Or You May Have to File Form 8621 Which Could Take you 48 hours

If you live abroad, or in the USA, do not make the mistake of purchasing a foreign mutual fund.  Why?  Such You must file as separate form for each foreign mutual fund each year.  If the aggregate value of your PFIC stocks are less than $25,000 if filing as single for $50,000 if fiing jointly you are excepted from filing.  There are other exceptions but they are complex and you should read 8621 Instructions to see if your particular situation is excepted.

The IRS estimates it could take 48 hours to analyze the data, analyze the law and then complete the form for just one foreign mutual fund investment (if not excepted from filing). You can  only guess the amount professional tax return preparers will charge to complete these forms.

What is solution to avoid this horrendous tax return problem?  Only purchase foreign stocks directly owned in your own name since these are treated the same as US stocks and the purchase, sale and reporting would be the same as for US stocks. An alternative is to purchase US mutual funds that invest in foreign stocks (these are not considered PFICs) and again treated the same on your tax return as a US stock.

Passive Foreign Investment Companies -Form 8621

One of the most overlooked forms for US expatriates making investments abroad, or any US taxpayer living in the US that invests in foreign mutual funds is Form 8621.  If you do not file this form and make certain elections allowed by that form (SEE INSTRUCTIONS TO FORM HERE) you may incur extremely adverse US tax consequences  when you finally sell your foreign investment.  This form is complex and often difficult to complete due to the elections you must make and the information which must be included in the form.  Most taxpayers overlook this form and its important elections because they assume a foreign mutual fund will  be treated the same as a US mutual fund.  It is not!

WHEN MUST THIS FORM BE FILED?  It should be filed when you own a foreign mutual fund (not sold in the US securities market) or you own a foreign corporation that as a major portion of its activities invests in foreign equities, foreign mutual funds and other foreign investments.  This form does not need to be filed is you merely own actual foreign stock certificates, or shares in a foreign corporation that does not produce passive investment income.

Form 8621 is filed annually with your personal tax return. A separate Form must be filed for each separate foreign mutual that you own.  If the foreign mutual fund is held in your US  stock brokerage account, you do not need to file this form.  See The Form 8621 here.  Though it appears simple, this form is difficult to complete correctly. Let us know if you need help.